Paid Time Off (PTO)

How Does PTO Work?

Most paid time off systems measure time off in hours instead of days. Employers either frontload an employee’s total allotted leave or allow them to accumulate the leave each pay period. Some do both based on the type of leave (e.g., frontload sick time but accrue vacation time).

Regardless, after an employee receives their PTO, they typically have to use it all by a specific deadline (i.e., a “use-it-or-lose-it” policy) or are allowed to roll over a limited amount of unused time to the next benefit period (e.g., calendar or fiscal year). However, most employers who allow PTO rollovers still cap the maximum amount of leave an employee can save.

PTO Laws and Compliance

As of 2024, no federal law requires employers to provide employees with PTO. However, the Family Medical Leave Act (FMLA) requires employers to give protected, unpaid leave for health or family issues. Most laws on paid and unpaid time off exist at the state and local levels, such as:

• Paid Sick Leave (PSL): Some states (e.g., Colorado, Maine, Washington, etc.) require employers to provide employees with paid sick time.
• Paid Family and Medical Leave (PFML): In addition to the FMLA, some states (e.g., California, New Jersey, and Oregon) require employers to provide additional paid leave for specific medical and family needs.
• PTO Payouts: Many states have laws regarding whether an employer must compensate employees leaving the organization for all their accrued but unused PTO. Some states have “use-it-or-lose-it” policies, while others require a PTO payout within a certain amount of time after terminating the employee or accepting their resignation.

PTO Policy Types

While the details of each organization’s paid time off policy vary, employers typically choose one of the following three systems:

Traditional PTO

Traditional PTO systems allocate specific amounts of leave across various categories based on the leave type (e.g., vacation time off, sick days, mental health days, etc.).

Moreover, employees can only take a certain amount of paid time off for each type, so they must carefully manage how much time is available in each category. Exhausting one too quickly can force them to take unpaid leave later, while hoarding time can create staffing issues if workers try to use all their time off at once.

Unlimited PTO

Some organizations offer unlimited PTO instead. This means employees can take as much time off as needed, provided their absence is approved by their manager in advance. This approach offers employees more flexibility with their use of paid time off while maintaining accountability for work productivity.

The core goals of an unlimited system are to promote a healthy work-life balance, foster trust between employees and employers, and enhance employee engagement through a flexible work environment.

However, without clear guidelines on what’s “appropriate use,” employees may ironically take less time off to avoid negative perceptions or because they feel less entitled to it.

PTO Banks

PTO bank systems consolidate an employee’s time off into a single, flexible pool for them to use at their discretion. This policy balances the structure of a traditional system with the flexibility of an unlimited one.

While there are still limits on PTO accruals, employers no longer need to calculate specific PTO allocations based on leave type or track PTO use across multiple categories.

Types of Paid Leave

Understanding the different types of paid leave can help employees in a traditional PTO system make the most of their benefits. The following leave types are widely recognized across most industries, but employers can choose to offer only some of them.

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Related Glossary Terms

• PTO Payout
• Extended Illness Bank (EIB)
• Floating Holiday